Table A2

Detailed basis for each component of the expected rate of return

Asset classesComponentsDetailed basis for calculation
Domestic bondsRisk-free interest rateEstimates of 3-year treasury bond interest rate
Credit spreadAverage of five-year spread between three-year treasury bonds and corporate bonds (A-–AA+)
Term spreadAverage of three-year spread between three-year and five-year treasury bonds
Expected capital gains and lossesEstimates of interest rate model and reflection of market duration
Foreign bondsRisk-free interest rateEstimates of 10-year US bond interest rate
Credit spreadAverage of five-year spread between 10-year US bonds and corporate bonds (A-–AA+)
Foreign Exchange Hedge PremiumAnnualize the weighted average premium of USD, EUR, JPY, and GBP per month
Domestic stocksGDP, CPIEstimates of Korean real GDP and CPI
Dividend yieldBloomberg survey forecast
Foreign stockGDP, CPIEstimates of the US's real GDP and CPI
Alternative investmentDomestic real estateEstimates of Korean CPI + 3%p
Foreign real estateEstimates of US CPI + 3%p
Domestic private equity(Expected return on domestic bond benchmarks + 2%) × 0.7 + (Expected return on domestic stock benchmarks + 1%) × 0.3
Foreign private equity(Expected return on foreign bond benchmarks + 2%) × 0.7 + (Expected return on foreign stock benchmarks + 2%) × 0.3
Domestic SOCEstimates of Korean CPI + 3%p
Foreign SOCEstimates of US CPI + 4%p

Note(s): (1) The spread and premium of the previous five years are calculated in an annual rolling manner; (2) Refer to the Public Employee Pension Park 2020 Asset Management Guidelines (IPS) for alternative investment spreads

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